United States

UNITED STATES Burlington Northern Santa Fe
19 August 2008 Riding the wave of trade

Initiating with an Outperform rating and a US$115 target price
Burlington Northern Santa Fe (BNI) is one of the largest railroads in North America.
BNI has a strong franchise, particularly in container trade (intermodal). We think that
intermodal can grow faster than average, but that it will also face more price
competition. BNI has a good productivity record.
The lifeblood of nations

BNI has a strong franchise in intermodal and coal products. Intermodal historically
grows above GDP, though it is also more volatile. A weak economy and a weak
dollar are likely to result in flat or negative growth for international intermodal
Inside volumes in the short term. Domestic intermodal volumes are also likely to see no
Investment considerations 4 growth. We expect a recovery from 2010. In the case of coal, uncertainty over
carbon legislation could limit growth for thermal coal intended for domestic power
Share price and valuation 15 plants in the next 5 years. There will likely be some upside from export coal in the
Financial outlook 20 short term. BNI is also exposed to the construction market where substantial
economic pain is still the order of the day. We expect volumes in the sectors
Company description 25 exposed to construction to decrease in 2008. We do not expect a recovery before
Analysis and sensitivities 35 2010. All in all, we expect BNI’s volume growth will be moderate in the short term,
but stronger than average afterwards.
Financials 39
Coming of age
BNI has a good if not stellar ROIC, in our view. The more-volatile container trade
has translated into tougher times for BNI in the past 2 years. We expect margins to
recover in 2009 and to improve from 2010, partly from continuing price increases
and partly from better operating performance. BNI should be making its cost of
capital within a couple of years. We expect top-line growth coupled with improving
productivity to drive EPS growth at an annual rate of about 18% through 2012.
High oil prices are good

BNI has achieved price increases of 1–3% above inflation for the past few years in
line with its peers. It has also been able to pass through most of the increase in its
cost of fuel. We expect that BNI will be able to increase its base prices 1–2% a year
over CPI for the next 5 years. Revenues per carload in intermodal have grown less
quickly than those of the overall freight business. This gap has moderated latterly as
high fuel prices have forced truckers to raise prices in order to stay in business.
Further fuel surcharges should be unnecessary as the price of oil stops increasing.
Analyst
Arturo Vernon
Valuation reflects BNI’s EPS growth potential
1 212 231 2566 arturo.vernon@macquarie.com
Rohit Vanjani We value BNI using a discounted cashflow approach. Our valuation is consistent
1 212 231 2485 rohit.vanjani@macquarie.com with a forward CY08E PER of 15.5x, above the average of 14.9x for BNI and 14.7x
for the industry over the past 12 months.
Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our
website www.macquarie.com.au/research/disclosures.
Macquarie Research Equities - Report Burlington Northern Santa Fe
BNI US Outperform Burlington Northern Santa Fe Corp

Stock price as of 14 Aug 08 US$ 98.82 Company profile
12-month target US$ 115.00
12-month TSR % +18.5 Burlington Northern Santa Fe (BNI) is one of two railroads offering rail-freight
Valuation US$ 105.00 transportation services over the two-thirds of the US west of the Mississippi River. It
- DCF (WACC 9.0%) is the second-largest railroad in North America by market capitalization.
GICS sector transportation BNI organizes its end markets into six major groups: agricultural products,
Market cap US$m 34,715
30-day avg turnover US$m 380.4 automotive, chemicals, energy, industrial products and intermodal.
Number shares on issue m 344.9
Intermodal: Intermodal accounted for 34% of freight revenues and 48% of carloads
Investment fundamentals in 2007. It is made up of two main segments, domestic and international. Both
Year end 31 Dec 2007A 2008E 2009E 2010E
segments transport containers primarily from West Coast ports to the Midwest.
About half of intermodal revenues come from international traffic and the other half
Sales revenue m 15,802 18,488 19,190 20,171
Reported profit m 1,829 1,938 2,336 2,682
from domestic traffic. Domestic intermodal includes the truckload/intermodal
marketing-companies segment and the expedited truckload/less-than-truckload
EPS adj ¢ 510.3 592.9 698.2 835.9
EPS adj growth % -0.1 16.2 17.8 19.7
segment.
PE adj x 19.3 16.6 14.1 11.8
Industrials: Industrial products accounted for 24% of freight revenues and 16% of
Total DPS ¢ 114.0 134.4 142.9 157.2 carloads in 2007. The industrial group is further subdivided into five sub-categories.
Total DPS growth % 26.7 17.9 6.3 10.0
Total div yield % 1.2 1.4 1.5 1.6 Construction products ships 33% of the group’s revenues and it includes steel
products, iron ore and various minerals and aggregates, most of which are used in
ROA % 10.7 11.6 12.4 13.6
ROE % 16.9 18.5 20.7 22.9 the infrastructure and general-construction industries. Building products contribute
EV/EBITDA x 9.0 7.8 6.9 5.9 29% of the group’s revenues; it includes mostly forest products linked to the
Net debt/equity % 70.1 74.5 74.5 74.6
residential construction and paper industries. Petroleum products accounted for
BNI US vs S&P 500 - US, & rec history 16% of the group’s revenues; shipments include LPG, diesel fuel, lubes and asphalt.
Chemicals and plastic products contributed 14% of the group’s revenues, used
mostly in the automotive, housing and packaging industries. Finally, food and
beverages account for 8% of the group’s revenues; it includes items such as canned
goods, perishables and beverages.
Coal: Coal contributed 21% of freight revenues and 24% of carloads in 2007. More
than 90% of the coal shipped by BNI comes from the Powder River Basin in
Wyoming and Montana. This coal is used by utilities to fire power plants. BNI also
transports coal from the Utah/Colorado and Illinois basins.
Agriculture: This group ships 17% of BNI’s freight revenues and 10% of its
Source: Datastream, Macquarie Capital (USA), August
2008 (all figures in USD unless noted) carloads. It includes commodities such as wheat, corn and soy beans. Corn-based
derivatives including fertilizers, ethanol and sweeteners account for roughly 42% of
the group’s revenues.
Automotive: This segment accounted for 3% of freight revenues and less than 2%
of carloads in 2007. Most of these cars are imports manufactured outside the US.
BNI is led by Matthew K. Rose. Mr. Rose has been BNI’s CEO since 2000. He
previously held a variety of marketing and operations positions. Before joining BNI,
he was an executive in a number of rail and trucking concerns. Current priorities
include improving fuel efficiency and expanding the network to capture identifiable
opportunities.
19 August 2008 2
Fig 1 Valuation comparison to transport stocks (US$)

Current Target CY PER CY EV/EBITDA Mkt Cap YTD Perf.
Company Symbol Rating Price Price 2008E 2009E 2008E 2009E US$ Abs. Rel.
Union Pacific UNP Neutral $77.63 $87 18.5x 15.5x 9.1x 7.8x $40,585 +24% +36%
Burlington North Santa Fe BNI Outperform $98.82 $115 16.7x 14.2x 8.1x 7.2x $34,715 +19% +31%
CSX CSX Outperform $61.18 $70 17.4x 14.4x 8.7x 7.6x $25,401 +39% +51%
Norfolk Southern NSC Neutral $70.49 $80 16.7x 14.6x 8.8x 8.0x $27,061 +40% +52%
Canadian National Railway CNI Outperform $51.58 $59 14.9x 12.9x 9.1x 8.1x $24,862 +10% +22%
Canadian Pacific CP Neutral $60.79 $66 14.7x 12.8x 8.5x 7.4x $9,429 -6% +6%
Kansas City Southern KSU N/R $50.54 -- 25.2x 19.3x 11.9x 10.2x $4,927 +47% +59%
Rails 16.7x 14.4x 8.8x 7.8x +24% +36%
JB Hunt Transport Services JBHT N/R $38.84 -- 24.6x 20.1x 11.7x 10.1x $4,968 +41% +53%
Landstar LSTR N/R $52.80 -- 24.3x 21.0x 21.7x 19.7x $2,799 +25% +37%
Con-way CNW N/R $53.01 -- 16.2x 13.4x 8.6x 7.9x $2,552 +28% +40%
Knight Transportation KNX N/R $19.48 -- 30.8x 24.9x 22.5x 19.4x $1,691 +32% +43%
Heartland Express HTLD N/R $18.38 -- 27.1x 22.8x 27.0x 23.2x $1,768 +30% +42%
Werner Enterprises WERN N/R $24.66 -- 27.3x 21.0x 13.1x 11.4x $1,760 +45% +57%
Trucking 25.9x 21.0x 17.4x 15.4x +31% +43%
Federal Express FDX N/R $86.96 -- 19.4x 15.2x 6.0x 5.7x $26,958 -2% +9%
United Parcel Service UPS N/R $65.59 -- 18.4x 16.4x 8.9x 8.2x $68,476 -7% +5%
Logistics 18.9x 15.8x 7.5x 7.0x -5% +7%
Note: Based on consensus estimates (per FactSet) if not covered; priced as of August 14, 2008.
Source: FactSet, Macquarie Capital (USA), August 2008
Fig 2 BNI’s EPS Fig 3 BNI share price has tended to follow EPS growth
US$ / share Index

6.0 1,600
5.0 1,400
1,200
4.0
1,000
3.0
800
2.0
600
1.0
400
- 200
(1.0) 0
1/4/1989
1/4/1991
1/4/1993
1/4/1995
1/4/1997
1/4/1999
1/4/2001
1/4/2003
1/4/2005
1/4/2007
(2.0)
19 9
19 0
19 1
19 2
19 3
19 4
95
19 6
19 7
98
20 9
20 0
20 1
20 2
20 3
20 4
20 5
20 6
07
08
8
9
9
9
9
9
9
9
9
0
0
0
0
0
0
0
19
19
19
20
Normalized EPS from FactSet; 2008 estimate is 1H08 annualized. Index: Jan 4 1989 = 100
Source: Company data, Macquarie Capital (USA), August 2008 Source: Company data, Macquarie Capital (USA), August 2008
19 August 2008 3
Investment considerations
Initiating coverage of Burlington Northern Santa Fe with an Outperform
rating and a US$115 target price
BNI, along with its peers, has profited from a strong pricing environment stemming from an
oligopolistic industry structure and emerging bottlenecks in the rail and road networks. The
container trade accounts for 30% of BNI’s revenue and we expect it to grow above the average
for the rest of the customer groups and above average for the industry. BNI also has very limited
exposure to the automotive sector that has dampened growth for its peers.
We believe BNI has one of the best ROICs in the US and it has attractive prospects for improving
it on the strength of price and volume gains. BNI has also been able to achieve steady progress
in improving its operating performance.
Fig 4 Intermodal and coal are the biggest segments for BNI
2% 1%
3%
10%
18% 18%
24%
21%
43%
16%
24%
18%
48%
34%
21%
Revenues Carloads Ton-miles
Intermodal Industrial Coal Agricultural Automotive
Source: Company data, 2007, Macquarie Capital (USA), August 2008
The lifeblood of nations

BNI along with its peers is feeling the effects of steep price increases and a softer economy in flat
volume growth. BNI’s customers in the intermodal, construction, chemicals and automotive
industries have been hit in the current economic slowdown. Intermodal is BNI’s strongest group.
The intermodal group depends on international commerce for 60% of its volume. Container flow
into the US has actually decreased as a result of the soft economy and the weak dollar. It is
unlikely that we will see any significant appreciation of the currency in the absence of higher
interest rates. The Fed is unlikely to raise rates while the economy wobbles along. We think that
container traffic will not start to pick up before next year at the earliest. Domestic intermodal traffic
has held up in spite of weak results from logistics firms, but overall growth in intermodal will likely
be muted for the next couple of years.
Longer term, we should see the resumption of above-average growth for the group as commerce
typically grows substantially faster than GDP. The trend may not be as strong as in the past
because shipping companies have diverted traffic from West Coast ports to their counterparts on
the East Coast and more traffic diversion is expected with the completion of the expansion of the
Panama Canal in 2014. Even so, the container trade should translate into volume growth of 4–5%
for BNI’s intermodal sector.
19 August 2008 4
Fig 5 Maritime-container traffic has grown above GDP over the long term
30.0 CAGR 95-05 = 6.9%

26.0
25.0
4.0
1.2
20.0 17.9
Million TEUs
3.2 7.7
15.0 13.3
0.7
3.0 5.0
10.0 0.5
3.4
13.1
5.0 9.0
6.5
0.0
1995 2000 2005
West Coast East Coast Gulf Coast Other
Note: TEU = Twenty-foot equivalent container

Source: US DOT/Bureau of Transportation & Statistics, America's Container Ports: Delivering the Goods, March 07,
Macquarie Capital (USA), August 2008
Volume growth in other sectors is also likely to remain under pressure for the next couple of
years. Many of the revenues in the group depend on infrastructure, commercial developments
and residential construction. Spending on infrastructure is increasingly being pushed to the
states, which in turn are being encouraged to tap into private capital to supplement strained state
resources. Most states have not yet mustered the technical skills and political will that it will take
to put these deals together, in our view. Commercial-property rents are decreasing as vacancy
rates remain at elevated levels. Finally, housing starts continue to decrease year on year,
inventories remain high and the financial industry is still finding further mortgage-related charges
to absorb. Ken Zener, our housing analyst, thinks that the housing slump has yet to reach the
bottom.
Fig 6 New housing starts in the US have continued to decline
2,000
1,800
1,716
1,600 1,611
1,499 1,465
1,400
1,359
Thousand units
1,200 1,273
1,000 1,046
934
800
600
400
200
0
2001 2002 2003 2004 2005 2006 2007 2008
Includes single-family and multi-unit housing; 2008 is forecast

Source: US Census Bureau, New Residential Construction, Macquarie Capital (USA), August 2008
19 August 2008 5
Fig 7 Index of industrial production 2002–08
120
115
Index (2002 = 100)

110
105
100
95
90
85
80
2
8
'0
'0
'0
'0
'0
'0
'0
'0
'0
'0
'0
'0
'0
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
1Q
3Q
Source: Federal Reserve Board, Macquarie Capital (USA), August 2008
Coal can be an attractive segment in the medium term. Over 90% of coal production in the US is
used in power generation. The power sector is under-invested and it is now running out of
capacity in many electric regions. Half of generated power in the country uses coal as its fuel and
the Energy Information Agency projects that additional generation capacity will come
preponderantly from coal plants.
The difficulty is that many of these coal plants are not actually being built. There is substantial
uncertainty around the form that carbon-related legislation will take and many utilities do not want
to commit long-term dollars to solutions that could have regulatory downsides. State public utility
commissions have to approve new coal plants and they have been reluctant to do so, even in
traditionally pro-coal states such as Virginia. In the short term, many utilities will end up building
gas-fired power plants in spite of historically high gas prices because they are the quickest to
build and because they have much lower carbon footprints than coal plants. Since the power
sector really is in need of low-cost additional capacity, the situation could yet change. Coal plants,
however, take 2–4 years to build. In the short term, we think it is premature to count on a
substantial incremental uptake of coal from the power sector. The mid term looks more
encouraging since we do not think that gas, nuclear or alternative fuels will be able to provide the
required power-generating capacity on their own.
The last of BNI’s important product groups is agricultural. About 40% of the group’s revenues
stem from corn or corn-related products. This improves growth prospects for the group because
corn has been growing even as total agricultural output has held steady for a decade. We see
continued growth of 5–6%.
19 August 2008 6
Fig 8 BNI has wide exposure to corn and corn-related products, 2007
Other feeds &

Sw eeteners 4%
DDG's
Soybeans 4%
Ethanol
10% 6%
Fertilizer
5%
Wheat
19% 42% corn-
Corn Export based
Bulk foods (non- 11% derivatives
corn)
5%
Fertilizer (non-corn) Whole Corn
7% domestic
12%
Other
17%
Source: Company data, Macquarie Capital (USA), August 2008
BNI has a very low direct exposure to the automotive sector. We believe this will help BNI as the
car industry continues to have unattractive prospects.
19 August 2008 7
Fig 9 We expect BNI to grow its volume at 3–4% pa

Macquarie forecast
CAGR 03-07 = 3.6% CAGR 07-12 = 3.6% 12,303

11,718 166
12,000
11,182 162
10,631
10,637 10,318 10,283 158
10,024 174 156 3,029
9,536 166 158 2,905
10,000 177
158 2,765
8,646 2,458 2,602
2,238 2,472 2,521
157
2,216
Thousand carloads
8,000
2,048
6,000 6,024
5,659
5,355
5,346 4,983 4,861 5,068
5,038
4,612
4,012
4,000
1,118 1,163 1,199 1,244

2,000 834 900 916 973 1,033 1,091
1,428 1,650 1,655 1,686 1,664 1,652 1,688 1,741 1,793 1,840
0 167 0 0 0 0 0 0 0 0 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Other consumer prodcuts Industrial Agricultural Intermodal Coal Automotive
Volume will likely In short, we suspect that there is a strong case to stick to BNI’s low volume-growth scenario in
be flat in 2008 and the short term. Longer term, we think that freight can grow above GDP as international trade
grow at an annual revives with the fortunes of the US economy.
rate of 3–4% in the
Coming of age
medium term
All rails including BNI have enormously improved their efficiency since the passage of the
Staggers Act in 1980. BNI has managed to generally improve its ROIC. BNI’s ROIC is amongst
the best in the US, but it still lags Canadian National’s ROIC. BNI’s ROIC is now close to its cost
of capital.
19 August 2008 8
Fig 10 BNI has an average ROIC, 2007 Fig 11 BNI has been improving its ROIC
8.5%
7.8%
7.4%
11.2% 4.8% 4.7% 4.5%

10.2%
7.8% 7.9%
6.9% 6.3%
BNI CNI CP CSX NSC UNP

2002 2003 2004 2005 2006 2007
ROIC WACC
ROIC has been calculated as net operating income less adjusted taxes
divided by invested capital (equity + debt + deferred income tax liabilities).
From the point of view of assets at management's disposal, tax liabilities for
all intents and purposes are an equity equivalent. See adjacent chart
Fig 12 Operating costs / carload, 2002–07 Fig 13 Operating margin / revenues, 2002–07
1,600 CAGR 02-07 = 5.9% 30%

1,400 24.3% 24.5%
1,194 25%
1,200 21.3%
1,078
971 1,004 18.4% 22.5% 23.5%
20% 17.7%
US$ / carload
1,000 895 896 17.2% 22.1%

18.5%
800 15% 17.6%
15.4%
600
10%
400
5%
200
0 0%
2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007
BNI Industry
Operating margin = 1- operating ratio. Industry includes BNI, CNI, CP, CSX,
NSC and UNP.
BNI’s commitment to bettering its operating performance can be seen in improving efficiency
indicators such as gross-ton-miles (GTM) per employee and GTM per gallon of fuel consumed.
19 August 2008 9
Fig 14 BNI’s workforce productivity has continued to improve
45 41.5 41.2 30
39.5
37.4 36.6 37.6
GTM / employee, thousands

40
25
Employees, thousands
35
30 20
25
15
20
15 10
10
5
5
0 0
2002 2003 2004 2005 2006 2007
BNI Employees BNI GTM/Employees Ind GTM/Ind Employees
GTM = Gross ton-miles (ton-miles traveled with both loaded and empty cars). Industry includes BNI, CNI, CP, CSX,
NSC and UNP.
Fig 15 Fuel efficiency Fig 16 BNI has more back-hauls than average
RTM / GTM
850 65%
800
60%
GTM / gallon
750
55%
700
50%
650
600 45%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007
BNI Industry BNI Industry
RTM = revenue ton-miles; GTM = gross ton –miles. Industry includes BNI,
Industry includes BNI, CNI, CP, CSX, NSC and UNP. CNI, CP, CSX, NSC and UNP.
Looking ahead, we believe BNI will attain ROIC levels of about 11% in 2012, up from 8% in 2007
and operating margins of 26% in 2012, up from 22% in 2007. We think BNI can attain these
metrics with likely increases in pricing and volumes, and only moderate improvements in its
operating performance.
19 August 2008 10
High oil prices are good

BNI has been able to increase prices in real terms and to pass on fuel surcharges, along with the
rest of its peers. This pricing power lies at the heart of the rapid appreciation of BNI’s share price
over the past few years.
Price increases have also been enabled to an extent by the difficulties of the trucking industry.
Since fuel accounts for perhaps 35% of a trucker’s revenues, compared to the railroads’ 20%,
truckers have been forced to raise prices just to stay in business. They have in effect provided a
price umbrella for the rails. This effect is particularly important in intermodal because it is the
segment that typically faces the most competition from trucking.
Fig 17 Industry revenue/GTM has grown in real terms since 2004
7
Macquarie
6
forecast
5
US cents
4
3
2
1
0
81
83
85
87
89
91
93
95
97
99
01
03
05
07
E
09
11
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
current $ constant 2006 $
Projection is on a somewhat different basis and it is meant only to be indicative; prices in constant US$ go down
because we are projecting a decrease in the price of fuel that we expect to result in reductions to the fuel surcharge.
Source: AAR, company data, Macquarie Capital (USA), August 2008
BNI’s revenues per carload excluding intermodal grew at an annual rate of 10.1% compared to
growth in intermodal rates alone of 8.8% in the period 2004-2007. In 2Q 2008, growth compared
to 2Q 2007 was 19.3% for all segments save intermodal and 18.3% for intermodal alone,
indicating that BNI has somewhat increased its pricing capability as truckers adjust their pricing to
a higher fuel cost environment.
We think price increases will slow down in response to lower oil prices and heightened prudence
to prevent regulatory action.
We expect oil prices to ease from US$120–130/bbl to US$90–100/bbl in the next 5 years. This
means that further increases in fuel surcharges would not be necessary. We expect the
surcharges to come down from current levels.
Price increases will We also expect BNI to moderate its base price increases because, together with the rest of the
likely continue at a industry, it faces a very vocal lobby of its own customers demanding lower rates and even the
lower level re-regulation of the rail industry. The industry likes to point out that rates have fallen in real terms
since 1980 but the story will prove to be a more difficult sell as prices start to climb back up.
19 August 2008 11
Fig 18 Industry ROIC has been below WACC as determined by the STB
14.0%
12.0% *
10.2%
10.0% 8.5%
7.6%
8.0% 7.0% 6.9% 6.8% 7.0%
6.5% 6.3% 6.1%
6.0%
4.0%
2.0%
0.0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Industry ROIC WACC
WACC for 2006 was unavailable in December 2007 (when AAR published its 10-year trend)
STB = Surface Transport Board; the STB is the federal regulator for the rails
Source: AAR, Macquarie Capital (USA), August 2008
It has also been the case that railroad companies including BNI have not been making their cost
of capital. This too will likely change in the years ahead, giving more credence to the shippers’
argument that the rails are earning a monopoly profit. Taken together, these trends mean that
raising rates in real terms beyond 2012 or so will become more difficult as they would expose BNI
to more vigorous shipper and regulatory action.
In summary, we think that rates will increase at 1–2% in real terms over the next 5 years.
BNI has a consistent track record of giving cash back to investors

We think BNI will BNI is an early believer in returning cash to shareholders. We applaud this stance as it looks
continue to buy unlikely that the company could profitably employ all of its free cashflow either through internal
back shares to investments or M&A opportunities. BNI has already substantially increased its capital
improve EPS and expenditures. M&A opportunities are probably limited to regional or local rail companies. The STB
share price growth is likely to veto anything that looks large and the rest of the companies are sufficiently small that
they can be accommodated through a moderate issue of additional debt as part of a rebalancing
of the company’s capital structure. Short-haul companies are not ideal fits with BNI’s business, in
our view, and, indeed, BNI along with its peers has spent much of the last decade spinning off
track to these smaller companies.
Target price of US$115 is above the 12-month average

We use a discounted cashflow methodology to arrive at target prices. Our target implies a 2008E
forward PER of 15.5x, above BNI’s and the industry’s average over the last 12 months. BNI’s
PER is based on a 2009E diluted EPS of US$6.97 compared to a consensus estimate of
US$6.98.
19 August 2008 12
Fig 19 Forward PER for BNI has been at the past year’s industry average of 14.7x
20
16
P to forward E 12
0
10/3/1995
10/3/1996
10/3/1997
10/3/1998
10/3/1999
10/3/2000
10/3/2001
10/3/2002
10/3/2003
10/3/2004
10/3/2005
10/3/2006
10/3/2007
Industry Composite BNI
We use 1-year forward earnings in our PER as a better predictor of market expectations at each point in time.
Industry includes BNI, CNI, CP, CSX, NSC and UNP.
Fig 20 EV to forward EBITDA
9.0
8.5
EV to forwrad EBITDA
8.0
7.5
7.0
6.5
6.0
5.5
5.0
01
01
8
00
00
00
00
00
00
00
00
00
00
00
00
00
00
20
20
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
4/
4/
24
24
24
24
24
24
24
24
24
24
24
24
24
24
2
2
1/
7/
1/
7/
1/
7/
1/
7/
1/
7/
1/
7/
1/
7/
1/
7/
Industry Composite BNI
We use forward rather than historical EBITDA as a better guide to market expectations at each point in time.
We think that this approach makes sense. We expect BNI to be able to sustain above-average
growth in EPS, that coupled with robust ROIC levels, should result in a higher-than-average
multiple.
19 August 2008 13
BNI is a solid firm with upside potential but it has been volatile
An entry point BNI’s shares have traded in a US$25/sh band from US$90/sh to US$115/sh. We think the stock
below US$100/sh would outperform if purchased below $100/sh. We would be neutral on the stock if purchased
looks attractive but above $105/sh. We would be most likely surprised on the downside if BNI were unable to re-price
prices above its business as anticipated, through either economic weakness or some form of re-regulation. On
US$105/sh could the upside, BNI could surprise by growing more quickly than we anticipate through enhanced
yield market returns container volume or additional coal/agricultural exports. Volume growth would also help improve
efficiency metrics.
19 August 2008 14
Share price and valuation

BNI’s share price has grown at a compound rate of roughly 29% during the last 5 years,
compared to the S&P 500’s 5–6%. This performance is based on the great strides in earnings
and enterprise free cashflow generation that BNI has taken over that period. BNI has generally
been able to command a premium because its return on invested capital was improving at a
faster rate than the average for the industry.
Fig 21 On a 5-year trend, BNI’s share price has been ahead of the industry average
Index
450
400
350
300
250
200
150
100
50
3
8
00
00
00
00
00
00
00
00
00
00
00
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
14
14
14
14
14
14
14
14
14
14
14
8/
2/
8/
2/
8/
2/
8/
2/
8/
2/
8/
S&P 500 BNI Industry

19 August 2008 15
Fig 22 BNI’s share price relative to the industry’s
Index
140
130
120
110
100
90
80
70
60
50
3
8
00
00
00
00
00
00
00
00
00
00
00
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
14
14
14
14
14
14
14
14
14
14
14
8/
2/
8/
2/
8/
2/
8/
2/
8/
2/
8/
BNI
Over the last year, BNI tracked the industry as its ROIC lost some of its luster. We think that in
the mid term, we can expect share price appreciation of 9–10% pa.
Fig 23 BNI’s share price has tracked the industry index over the past year
Index
150
140
130
120
110
100
90
80
70
7
8
00
00
00
00
00
00
/2
/2
/2
/2
/2
/2
/7
/7
7
7
8/
2/
4/
6/
10
12
S&P 500 BNI Industry
Composite includes BNI, CNI, CP, CSX, NSC and UNP.

19 August 2008 16
Fig 24 BNI’s share price performance relative to the industry’s
Index
110
105
100
95
90
85
80
7
8
00
00
00
00
00
00
00
00
00
00
00
00
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/2
/7
/7
/7
7
7
8/
9/
1/
2/
3/
4/
5/
6/
7/
10
11
12
BNI
Industry = composite of BNI, CNI, CP, CSX, NSC and UNP

DCF analysis yields a price in line with current market values

We use a discounted cashflow (DCF) approach as a primary valuation tool and we test for
reasonableness by comparing the resulting PER and EV/EBITDA multiples to peers and to the
industry average.
Valuation approach: We project financial statements for 20 years in our DCF model to ensure
that margins, growth rates and capex are consistent with a long-term view of the company even if
we choose to model mid-term improvements in efficiency or asset utilization. We model free
cashflow to enterprise, take the present value of the cashflows, then add back cash and
investments, and finally subtract debt to arrive at the value of equity. We divide the value of equity
into our estimated number of diluted shares to arrive at our price target.
Valuation parameters: We use a WACC of 9% based on a market beta of 1.1 that we un-lever
and re-lever as appropriate to accommodate changes in capital structure. We use 3% as a
terminal value growth rate. This number is also our estimate for long-term inflation. Thus, we
assume no growth in real terms beyond 20 years to avoid the pitfall of working infinite growth in
our terminal value formula. These WACC and terminal growth rates are consistent across our rail
coverage. Finally, we check that our projections are consistent with a terminal ROIC somewhat
above our WACC. We think rail companies may be able to sustain returns above their WACC
because of their unique circumstances.
Volume: Volume growth is driven by our assessment of likely economic performance for
representative sectors such as international trade, construction, coal mining and agriculture
modified as appropriate for the company’s special circumstances such as the recent floods in the
Midwest, or the possibility of enhanced coal exports. These assumptions are consistent across
our coverage of the railroad space.
19 August 2008 17
Prices: Prices are driven by our expectations of inflation, the company’s ability to increase prices
beyond CPI for each of its customer groupings and the company’s ability to pass on increases in
the cost of fuel to its clients. We expect that base pricing will increase annually at a rate of 0–2%
over CPI for the next 5 years. We tie fuel surcharges to the price of oil. Macquarie forecasts that
oil will come down to US$90–100/bbl in 2010–12. We expect fuel surcharges to come down
proportionately.
Costs: Costs are driven primarily by our assumptions on labor productivity and fuel efficiency.
We give credit for some improvement in fuel efficiency, and somewhat less in labor productivity.
We increase average salaries slightly faster than inflation. Costs related to maintenance and
equipment are driven off sales. Casualty costs are driven off salaries.
Taxes: We project tax expenses with the statutory rate. We assume cash taxes to be consistent
with a fiscal asset life of about 7 years compared with a financial asset life of 35–40 years. This
yields a tax rate of about 32–33%.
Capital structure: We model capital structure to a target ratio of equity to equity plus debt. This
is consistent with the company’s management of its capital structure since it aims for a credit
rating near the limit of investment grade. The company’s ratios have been fairly stable for the last
few years.
Cash / share buybacks: We assume that free cashflow after dividends will be used to buy back
shares. This is consistent with the company’s stated philosophy.
Our DCF model yields a price target of US$108 for 2008 and of US$118 for 2009. We interpolate
to arrive at a 12-month target of US$115.
Fig 25 DCF model, estimates from 2008 (US$)

2004 2005 2006 2007 2008 2009 2010 2011 2012
EBIT 1,686 2,922 3,517 3,486 3,873 4,439 5,015 5,540 6,134
+ Depreciation 1,012 1,075 1,130 1,293 1,387 1,483 1,584 1,693 1,808
EBITDA 2,698 3,997 4,647 4,779 5,260 5,922 6,599 7,232 7,943
+ Cash income taxes on EBIT (211) (651) (916) (802) (1,239) (1,420) (1,605) (1,773) (1,963)
+ Capex (1,527) (1,750) (2,014) (2,248) (2,372) (2,666) (2,874) (3,123) (3,453)
+ Changes in Working Capital (23) (59) (23) (98) 338 (56) 35 115 129
Enterprise FCF 937 1,537 1,694 1,631 1,987 1,780 2,155 2,451 2,656
Growth YoY (%) 0.0% 64.0% 10.2% -3.7% 21.8% -10.4% 21.1% 13.8% 8.3%
Valuation
PV of operations (calculated) 37,898 39,734 39,449 43,841 45,686 48,048 50,268 52,289 54,380
Growth YoY (%) 6.3% 4.8% (0.7%) 11.1% 4.2% 5.2% 4.6% 4.0% 4.0%
Liquid assets 322 75 375 330 377 388 410 443 480
+ Investments - - - - - - - - -
+ Cash 322 75 375 330 377 388 410 443 480
Debt 6,516 7,154 7,385 8,146 8,619 8,955 9,293 9,625 10,012
+ Short-term debt 465 456 473 411 512 519 520 556 573
+ Long-term debt 6,051 6,698 6,912 7,735 8,107 8,436 8,773 9,069 9,439
Market capitalization (calculated) 31,704 32,655 32,439 36,025 37,444 39,482 41,385 43,106 44,848
Market capitalization (actual) 17,785 26,446 26,513 29,183 35,690
Growth YoY (%) 9.4% 3.0% (0.7%) 11.1% 3.9% 5.4% 4.8% 4.2% 4.0%
EPS ($/share) USD 2.10 4.01 5.10 5.10 5.92 6.97 8.35 9.86 11.53
Growth in EPS YoY (%) -4.2% 90.9% 27.3% -0.1% 16.2% 17.7% 19.7% 18.2% 16.9%
Price ($/share) (calculated) USD 84.2 85.5 87.7 100.4 107.8 117.9 128.8 140.8 154.5
Note: the model discounts cashflows to 2027; we use a terminal value formula with terminal growth rate of 3%. WACC is 9%.
Source: Macquarie Capital (USA), August 2008
19 August 2008 18
Our target price is consistent with valuation multiples in the middle of

the trading range
Our current valuation places BNI somewhat above its record closing price in June 2008. Our
target price is 9% higher than our valuation price. We believe this is reasonable as BNI recovers
from a slowing economy. The company’s fundamentals remain strong, in our view.
19 August 2008 19
Financial outlook
We forecast that BNI will grow its revenues at an annual rate of 8–9% over the next 5 years. We
expect BNI’s operating ratio to decrease from 78% in 2007 to 74% in 2012. We expect most of
this improvement as a result of higher prices and volumes and only modestly from better
operating efficiency.
Fig 26 We expect BNI’s operating margin to expand as the economy improves
USD billion
25 30%
25%
20
20%
15
15%
10
10%
5
5%
- 0%
2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E
Revenues Op. Margin
Operating margin = 1 - operating ratio; the improvement in this margin is basically due to price increases in real
terms
Revenue: Our revenue forecasts result from volume growth rates staying flat to down in 2008,
growing by 3.4% in 2009 and by around 5% through 2012 as the economy comes back to life.
From 2013 we assume volume growth comparable to GDP growth of about 2.6%. Prices will
increase at around 2–3% in nominal terms throughout the period. Since we factor in fuel
surcharges into our revenue expectations, revenue growth is also affected by our forecast that oil
prices will ease from their current levels in the years ahead and that eventually diesel prices will
follow. We assume that fuel surcharges will come down with the price of diesel.
Operating ratio: The operating ratio will decrease as a result of higher real prices and lower
expected fuel prices. Salaries and benefits will stay roughly constant as a percent of revenues
because we see salaries increasing slightly above CPI. As BNI’s finances become stronger, there
is a chance that unions could pressure for increases in real terms. We have not factored this
eventuality into our expectations. Depreciation will also stay roughly constant as a percent of
revenues because of BNI’s improved capex spending.
EPS: We expect EPS to grow 16% in 2008 to US$5.92, up from US$5.10 in 2007, and a further
18% in 2009 to US$6.97. Our estimates compare to consensus of US$5.91 in 2008 and US$6.98
in 2009. EPS is driven by our revenue and operating margin assumptions, but also by our
expectations that BNI will buy back US$1.7bn worth of its shares in 2008 and a further US$1.4bn
in 2009. These buybacks would account for 3% and 4%, respectively, of shares outstanding in
each of those years.
19 August 2008 20
Fig 27 We think BNI can grow its EPS at close to 18% pa
USD
14 100.0%
12 11.53
80.0%
9.86
10
8.35 60.0%
8 6.97
5.92 40.0%
6 5.10 5.10
4.01 20.0%
4
2 0.0%
0 -20.0%
2005 2006 2007 2008E 2009E 2010E 2011E 2012E
EPS EPS Growth (sec. axis)
Capex: We expect capex spending to average about US$2.9bn through 2012, or approximately
14% of revenues and 1.8x depreciation. BNI’s capex spending relative to its revenues is lower
than the industry’s. The 2008 capacity expansion program is expected to be approximately
US$350m lower than from 2007.
Fig 28 We expect BNI's capex spending to continue at its current levels
4.0 20%
18%
3.5
16%
3.0
Capex / revenues, %
14%
Capex , billion USD
2.5
12%
2.0 10%
8%
1.5
6%
1.0
4%
0.5
2%
0.0 0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
BNI Capex BNI Capex/BNI Revenue Ind Capex/Ind Rev

19 August 2008 21
Free cashflow: Free cashflow to enterprise was about 10% of revenues and 89% of net income
in 2007. We expect the revenue ratio to stay roughly at 10–11% through 2012, but the income
ratio to decline somewhat to 79% through 2012. The current high cash conversion in relation to
net income is due to improved margins and relatively low capex spending.
Fig 29 BNI's FCF to enterprise / Revenue
14%
12%
10%
8%
6%
4%
2%
0%
2004 2005 2006 2007 2008 2009 2010 2011 2012
BNI Industry
FCF = Free cashflow. This is the number we use in our valuation; it is based on EBIT less adjusted taxes plus
depreciation.
Fig 30 BNI's FCF to enterprise / Net income
140%
120%
100%
80%
60%
40%
20%
0%
2004 2005 2006 2007 2008 2009 2010 2011 2012
BNI Industry
FCF = Free cashflow. This is the number we use in our valuation; it is based on EBIT less adjusted taxes plus
depreciation. Industry includes BNI, CNI, CP, CSX, NSC and UNP.
Share repurchases: Our buyback estimates are based on the expectation that BNI will use the
bulk of its free cashflow to re-purchase its shares. We expect BNI to buy back an average of
US$1.9bn worth of shares every year through 2012, or about 4% of outstanding shares each
year.
19 August 2008 22
Fig 31 BNI's repurchases / Net Income
105%
90%
75%
60%
45%
30%
15%
0%
2004 2005 2006 2007 2008 2009 2010 2011 2012
BNI Industry

We project cash Tax rate: BNI’s tax expenses have kept close to its statutory level of 37–38% over the last few
taxes will be around years and we expect them to stay there. Taxes paid have stayed at a level of 22–26%. Our
32–33% projection is based on cash taxes of around 32–33% in the future. The lower cash rate stems
from the difference between fiscal asset lives of about 7 years compared to financial asset lives of
30–40 years.
Leverage: BNI has a Baa rating on its debt. We expect BNI to conserve this rating since it is
close to its optimal capital structure. BNI’s leverage has come down marginally from 44% of debt
plus equity in 2003 to 42% in 2007. Its interest coverage, as measured by EBIT / Interest
expense, has improved from 4.0x in 2003 to 6.2x in 2Q08. We forecast the ratio to increase to
8.7x by 2012. Measuring interest coverage as EBIT + rents / Interest expense + rents paints a
more nuanced picture of BNI’s fixed payment obligations. This ratio stood at 3.4x in 2007. Our
forecast assumes today’s leverage as we suspect that BNI will do what it can to keep its
investment grade rating.
Fig 32 We expect BNI’s leverage to stay at its current levels
50%
40%
30%
20%
10%
0%
2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E
BNI debt/(debt+equity) Ind debt/(debt+equity)

19 August 2008 23
Fig 34 BNI's (EBIT + rents) to (Interest + rents)

Fig 33 BNI's EBIT to interest coverage ratio coverage ratio
10.0 4.0
9.0 3.5
8.0
3.0
7.0
6.0 2.5
5.0 2.0
4.0 1.5
3.0
1.0
2.0
1.0 0.5
0.0 0.0
2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2003 2004 2005 2006 2007
BNI Industry BNI Industry
Industry includes BNI, CNI, CP, CSX, NSC and UNP. Rents represent a commitment to pay a stream of income much as would be
the case with interest. Industry includes BNI, CNI, CP, CSX, NSC and UNP.
Source: Company data, Macquarie Capital (USA), August 2008 Source: FactSet, company data, Macquarie Capital (USA), August 2008
Fig 35 Key company metrics (US$)

2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E
P&L
Revenues $ 8,979 $ 9,413 $ 10,946 $ 12,987 $ 14,985 $ 15,802 $ 18,488 $ 19,190 $ 20,171 $ 21,765 $ 23,546
Volume ('000s carloads) 8,646 9,536 10,024 10,637 10,318 10,283 10,631 11,182 11,718 12,303
EPS $ 2.10 $ 4.01 $ 5.10 $ 5.10 $ 5.92 $ 6.97 $ 8.35 $ 9.86 $ 11.53
EPS Growth 90.9% 27.3% -0.1% 16.2% 17.7% 19.7% 18.2% 16.9%
Efficiency
ROIC 4.8% 4.7% 4.5% 7.4% 8.5% 7.8% 8.1% 9.0% 9.8% 10.3% 11.0%
Operating Margin 18.5% 19.7% 17.1% 21.3% 24.4% 24.4% 24.0% 26.6% 28.5% 29.1% 29.8%
GTM/Employees 23.4 24.9 26.9 26.8 27.0 27.2 27.4 28.0 28.8 29.0 29.0
GTM/Gallon 760 751 753 757 758 778 785 789 792 796 800
Investment
Capex $ 1,358 $ 1,726 $ 1,527 $ 1,750 $ 2,014 $ 2,248 $ 2,372 $ 2,666 $ 2,874 $ 3,123 $ 3,453
Capex/revenues 15.1% 18.3% 14.0% 13.5% 13.4% 14.2% 12.8% 13.9% 14.2% 14.3% 14.7%
Capex/depreciation 1.90x 1.51x 1.63x 1.78x 1.74x 1.71x 1.80x 1.81x 1.85x 1.91x
Liquidity
EBIT/Interest 4.0 4.1 6.7 7.3 6.8 6.9 6.8 7.5 8.6 8.7
Debt/(Debt+Equity) 44.0% 41.2% 42.9% 41.2% 42.2% 43.8% 43.8% 43.8% 44.0% 44.1%
FCF/Net income 118.5% 100.4% 89.8% 89.2% 102.5% 76.2% 80.3% 81.2% 79.3%
Note: The model discounts cashflows to 2027; we use a terminal value formula with terminal growth rate of 3%. WACC is 9%.
19 August 2008 24
Company description
BNI is one of two railroads offering rail freight transportation services over the two-thirds of the
United States west of the Mississippi. It is the second-largest railroad by market capitalization
after Union Pacific (UNP), the other rail serving the western US.
Fig 36 BNI’s network lies west of the Mississippi
BNI organizes its end markets into six major groups: agricultural products, automotive, chemicals,
energy, industrial products and intermodal.
Intermodal
BNI has a large Intermodal accounted for 34% of freight revenues and 48% of carloads in 2007. It is made up of
exposure to two main segments, domestic and international. Both segments transport containers primarily
intermodal and we from West Coast ports to the Midwest and on to the Eastern Seaboard. About half of intermodal
expect it to grow revenues come from international traffic and the other half, from domestic traffic. Domestic
above GDP in the intermodal includes the truckload/intermodal marketing-companies segment and the expedited
mid term truckload/less-than-truckload segment.
19 August 2008 25
Fig 37 Half of BNI’s intermodal revenues come from international trade, 2007
Domestic
International
49%
51%
Container traffic has been steady throughout the years and is expected to continue to grow at
7−8% into the future, notwithstanding a soft patch in 2007 and 2008. China, Japan, Hong Kong,
Taiwan and South Korea originated approximately 60% of all maritime container traffic inbound to
the US and received about 50% of all outbound traffic. These imports/exports pass mostly the
ports of Los Angeles/Long Beach in the south and those of Seattle/Tacoma in the north.
Fig 38 Container traffic flow, Top 20 US ports, 2003–07
CAGR 03-07 = 7.6% 28.2

30 26.8
24.9 0.2
0.2 1.8
22.8 1.6
25 20.6 0.2
1.6
0.2
1.5
20 0.2 10.9
1.4 10.1
9.5
Million TEU
8.8
15 7.9
10
14.9 15.3
12.3 13.6
5 11.2
0
2003 2004 2005 2006 2007
West Coast East Coast Gulf Other
The top 20 ports account for 94–96% of container traffic; statistics shown combine imports and exports.
Source: IANA, Macquarie Capital (USA), August 2008
19 August 2008 26
Fig 39 Intermodal traffic totals by month, 2004–08
Source: IANA, Macquarie Capital (USA), August 2008
Container flow may change when the extension to the Panama Canal is completed in 2014.
There are already instances of shippers carrying goods intended for the East Coast making an
all-seaborne trip rather than freighting the containers across the continent. Eastern ports and rails
are preparing for more traffic in the future. If this trend becomes pronounced, BNI may see either
its intermodal prices or volumes affected.
International intermodal traffic ultimately depends on trade flows. We believe that a strengthening
dollar coupled to a reviving economy will drive renewed growth in container traffic.
Industrials
About 60–70% of the Industrial products account for 24% of freight revenues and 16% of carloads in 2007. The
industrial group’s industrial group is further subdivided into five sub-categories. Construction Products ships 33% of
products depend the group’s revenues and it includes steel products, iron ore and various minerals and
directly or indirectly aggregates, most of which are used in the infrastructure and general construction industries.
on construction and Building Products contribute 29% of the group’s revenues; it includes mostly forest products
auto linked to the residential construction and paper industries. Petroleum Products accounted for 16%
of the group’s revenues; shipments include LPG, diesel fuel, lubes and asphalt. Chemicals and
Plastic products contributed 14% of the groups revenues used mostly in the automotive, housing
and packaging industries. Finally, food and beverages account for 8% of the group’s revenues; it
includes items such as canned goods, perishables and beverages.
19 August 2008 27
Fig 40 Breakdown of the industrial group's revenues, 2007
Food and Beverages

8%
Chemicals and
Construction
Plastics
33%
14%
Petroleum
16%
Building
29%
We think the industrials group will see flat volume in 2008 ahead because its two main end-
industries are not likely to recover before 2009. We elaborate on automotive below. Residential
construction remains a cloud on the US economy. Sales of new single-family homes fell 40.3%
from a year ago in May 2008. At this pace of sales, inventories represent 10.9 months of supply
compared to 7.8 months a year ago. Mortgage applications continue to decline. The share prices
of home builders have continued to decline and are now in 6–8 year lows.
Fig 41 New residential construction housing starts have continued to decline
1,716
1,611
1,499 1,465
1,359
1,273
1,046
345 369 382

274 293 304 260
161
2001 2002 2003 2004 2005 2006 2007 2008
Annual First quarter
Units are in thousands. A single or multi-family home is each counted as a unit.

Source: US Census Bureau, Macquarie Capital (USA), August 2008
Commercial construction is also weak. Non-residential construction for the first 5 months of 2008
is down 6% in revenue terms on the same period last year. Although some observers believe that
the worst is over, the market remains skittish. Commercial vacancy rates are not particularly
alarming at 13% as of mid 2008, but there is enough nervousness among tenants that it has been
hard to pass on price increases. Commercial construction is also unlikely to be a source of growth
through next year.
19 August 2008 28
Finally, construction of infrastructure will be hampered by strained state budgets, the exhaustion
of the Federal Highway Fund in 2009 and limited support for Private Public Partnerships aside
from a few progressive states such as Virginia and Florida. It is difficult to see how spending can
increase much above the pace of inflation in the current political impasse.
Consumer spending is also muted as the economy takes a toll on consumer confidence.
Energy
We think coal will Coal contributed 21% of freight revenues and 24% of carloads in 2007. More than 90% of the
grow at 4% through coal shipped by BNI comes from the Powder River Basin in Wyoming and Montana. This coal is
2012 used by utilities to fire power plants. BNI also transports coal from the Utah/Colorado and Illinois
basins.
Over 90% of coal produced in the US is used primarily in power generation. Most of the balance
is metallurgical coal used in the production of steel. Exports are starting to be important as
worldwide demand is increasing beyond supplies. Prices of all types of coal in the US have seen
steep increases over the last few months.
Fig 42 Most coal consumed in the US is used to fire power stations, 2007
Resid /
Other Industrial
Commer
5%
0%
Coke Plants
2%
Electric Power
Total = 1,129 93%
short tons
Source: EIA, 2007, Macquarie Capital (USA), August 2008
Coal for power stations

Traditionally the two key characteristics of coal for power stations were sulfur content and heat
content. High sulfur content results in harmful pollutants. Most utilities have already installed or
are installing scrubbers at their plants to remove sulfur oxides from their exhaust fumes.
Increasingly, it is heat content that becomes the paramount variable to observe in coal.
19 August 2008 29
Fig 43 Coal prices by basin of origin, 2005–08
Source: EIA, Macquarie Capital (USA), August 2008
There are two main coal-producing regions in the US: the SPRB and the Appalachians. Coal from
the SPRB has 30% less heat content than that found in the Appalachians, but is also a lot
cheaper to mine. SPRB mines tend to be open pit, whereas the Appalachians require deep
underground shafts. Production from the Appalachians is expected to go into long-term decline.
This means that more production will be eventually required from the SPRB, and that 30% more
coal will be needed to substitute for each ton of Appalachian coal. Coal is overwhelmingly
shipped by rail and UNP is one of two big players in the SPRB.
19 August 2008 30
Fig 44 Coal production in the US has held fairly constant
Million short tons CAGR 02-07

1,400 = 1.7%
1,200
13.3% 13.1% 12.9%
1,000 13.7% 13.2%
800 35.1% 35.1% 33.6% 32.9%

35.1%
600
16.0% 14.9% 14.6%
16.1% 16.1%
400
200 35.1% 35.7% 35.7% 38.4% 39.6%
-
2003 2004 2005 2006 2007
Wyoming Other Western Appalachia Interior
Source: EIA, Macquarie Capital (USA), August 2008
This positive longer-term trend is unlikely to come to fruition immediately. Power plants need to
retrofit in order to burn coal with differing heat contents. Retrofits can cost US$100m per plant. As
already noted, coal-fired plants are being held up due to legislative uncertainty over carbon
emissions. Coal producers are being cautious about expanding capacity. In the end, however, we
do not see another viable solution to the looming shortage of power capacity.
Metallurgical coal
There is also surging worldwide demand for steel primarily driven by China. Iron ore producers
have been able to charge steep price increases to steel makers. The price of metallurgical coal is
in the range of US$90–100/short ton, up from US$64/short ton in 2004. Coal from the
Colorado/Utah Basin is metallurgical (met) grade. BNI will see shipments increase rapidly from a
low base, again subject in the short term to cautious upgrading of production capacity at the
mines.
Agriculture
We think BNI’s This group ships 17% of BNI’s freight revenues and 10% of its carloads. It includes commodities
exposure to corn such as wheat, corn and soy beans. Corn-based derivatives including fertilizers ethanol and
will translate into sweeteners, account for roughly 42% of the group’s revenues.
somewhat higher
growth for the
segment of 3–4% pa
19 August 2008 31
Fig 45 Breakdown of the agricultural group's revenues, 2007
Other Corn
23% 23%
Ethanol
6%
Wheat
Fertilizer 19%
11%
Bulk foods Soybeans

9% 9%
Fig 46 Major uses of cropland in the US, 2002
62
Harvested
Failed
40
U.S. total = Fallowed
442 million Idle
16
acres Cropland pasture
17
307
Fallowed: cultivated summer fallow; Idle: acreage diverted from crops under several federal programs; Cropland
pasture: cropland in rotation temporarily devoted to pasture or marginal cropland usually devoted to pasture
Source: Major uses of land in the United States, 2002, Economic Research Service, USDA, Macquarie Capital
(USA), August 2008
The area devoted to the planting of major crops has not changed substantially over the last
decade and it is unlikely to do so in the future. Incremental production will come mainly from
improvements in agricultural yield. In the case of corn and soy beans, yield has improved 1–2%
per year over the last 7 years. Other major crops have been flat.
19 August 2008 32
Fig 47 Acreage harvested in the United States has held steady
350
308 304 299 307 305 304 295 304
300
250
Million acres
200
150
100
50 87
72 69 69 71 74 75 71
0
2000 2001 2002 2003 2004 2005 2006 2007
Corn Soy beans Hay Wheat Cotton Other
Source: Crop Production Historical Track Records, April 2008, USDA/NASS, Macquarie Capital (USA), August 2008
Fig 48 Yields of major crops in the US have improved only slowly
Right-hand scale
180 151.1 3.0
160
2.5
140
Bushels / acre
120 2.0
Tons / acre
136.9
100
1.5
80
60 1.0
40
0.5
20 38.1 41.2
0 0.0
2000 2001 2002 2003 2004 2005 2006 2007
Corn Soy beans Wheat Hay
Source: USDA/NASS, Crop Production Historical Track Records, April 2008, Macquarie Capital (USA), August 2008
BNI benefits from greater agricultural exports because of longer hauls to the West Coast and
from increased use of corn in the production of ethanol for the same reason. Petrol consumption
is higher in the urban centers along the coast than in the Midwest. All in all, we would expect the
agricultural products to grow its volume at an annual rate of 3–4%.
Automotive
This segment accounted for 3% of freight revenues and less than 2% of carloads in 2007. Most of
these cars are imports manufactured outside the US.
Light vehicle sales in the US stayed fairly constant during 2000–07. 1H08 has been more difficult.
Car sales have held up but light trucks have lost 19% YTD July 2008. We expect further losses
as consumers scramble to re-adjust their driving habits around much higher prices for oil. We
anticipate a slow recovery for the market as a whole.
19 August 2008 33
Fig 49 New light vehicle sales and leases have stayed flat for nearly a decade
20
18 17.4 CAGR 02-07 = -0.2% 17.1
16
Million vehicles
14
8.5 8.7 8.7 9.0
12 9.0 9.4 9.3 8.7
10
8
6
4 8.9 8.4 8.1 7.6 7.7 7.8 8.1
7.5
2
0
2000 2001 2002 2003 2004 2005 2006 2007
Passenger cars Light trucks
Source: US Department of Commerce, Bureau of Economic Analysis, Underlying Detail for the National Income and
Product Account Tables, Internet site www.bea.doc.gov/ as of 12 March 2008, table 7.2.5S, Macquarie Capital
(USA), August 2008
To the extent that BNI has exposure to domestic car makers, freight carloads will be further
affected. GM, Ford and Chrysler have lost ground to foreign producers and the latest round of
planned plant closures points to deeper retrenching before they are able to recapture share.
Although the weak dollar has revived export growth over the last 5 years, we believe incremental
sales from this source are not a sufficient counterweight to an otherwise challenging scenario.
Fig 50 Light vehicle retail sales have continued to fall, YTD May 2008
10 9.2
Million vehicles
9 8.2
8 2.4
7 2.3
6 2.2
5 2.1
4
3
4.7
2 3.8
1
0
2007 2008
Detroit Foreign, U.S. built Foreign, imported
Light vehicles include passenger cars and light trucks; new lease figures are not included
Source: www.motorintelligence.com/m_frameset.html, public area, Macquarie Capital (USA), August 2008
All in all, we believe the car industry will continue to see challenging times ahead. BNI’s limited
exposure to this sector will let it weather the storm better than its counterparts, in our view.
19 August 2008 34
Analysis and sensitivities

Overall, we think that BNI has solid prospects for the future even if these are fully priced. There
are a number of issues that would modify our outlook on the company should they happen.
Strategic issues
Regulatory action: There are two Bills in Congress that would curtail BNI’s ability to price its
services, and ultimately to invest in its network. The Bill that has seen the most recent activity, the
Railroad Antitrust Act, was sent for debate and voting to the floor of the House in April 2008. It
now looks unlikely that any action would be taken on this or the other Bill, the Railroad
Competition and Service Improvement Act, before the presidential elections in November.
Activist shareholders: Berkshire Hathaway held 18% of shares outstanding in BNI as of March
2008. This investor has doubled its position in the last year. Berkshire emphasizes shareholder
value, but it is also well known for letting management steer the company on its own. We do not
think Berkshire’s holdings will translate into a substantial impact on the way BNI does business.
Deeper recession than currently anticipated: We have built a scenario assuming that GDP
contracts by 1% for four quarters starting with 4Q08 as opposed to the modest expansion of
about 1% that Macquarie has forecast for the same period. We assume that the main effect of a
deeper recession would be on volumes rather than prices. Railroads, including BNI, have been
able to raise prices in the face of lower volumes for most of 2007 and the first half of 2008. They
remain in a structurally strong position and trucks continue to suffer disproportionately from higher
oil prices.
Under these circumstances, our 2009E EPS would fall 5% to US$6.65 from US$6.97 and our
target share price would fall by about 3% to US$112 from US$115.
Fig 51 Scenario: anticipated results in case of a deeper recession

Scenario parameters 2009E EPS, US$/sh Target share price, US$/sh
Scenario Base Scenario Base Scenario Base Scenario
GDP growth, 4Q08–3Q09 1.4% -1% 6.97 6.65 115 112
Key market sensitivities

Intermodal: Intermodal accounts for 33% of BNI’s revenues. Intermodal depends on
international container trade for half of its revenues. Although trade has historically grown at
annual rates exceeding 7%, or double the growth in GDP, growth can quickly stop in the face of a
weak economy or a weak currency, both of which reduce the demand for imports. We think we
will continue to experience these conditions in 2009 with a slow recovery after that. We could be
surprised on the upside by a quicker recovery.
Coal: Coal accounts for 21% of BNI’s revenues and 43% of its ton-miles. We think that demand
for coal is not currently as strong as one would think by noticing the looming capacity shortfalls in
power generation across the land because not all power plants are actually being built. This could
change if federal legislators pass a Bill that removes uncertainty on how carbon emissions will be
treated, and that allows solutions that are competitive when compared to gas. This is a plausible
scenario given that gas supplies seem to keep falling short of demand and that the cost of
building new nuclear power stations is not competitive with current costs of coal-fired power
plants. Since coal plants take 2–4 years to build, surging demand will not ramp up all of a sudden.
19 August 2008 35
On the supply side, coal producers are having trouble finding the capital and the workers to
expand production to meet increased demand for exports in spite of surging spot prices. Top coal
producers such as Peabody hope to increase production by 10% next year. Smaller producers
are likely to grow at a much lower rate. Part of miners’ reluctance to expand capacity comes from
a history of boom and bust resulting from the expansion of capacity beyond what new demand
can sustain. The most recent instance of this phenomenon happened only in 2006–07.
Agricultural products/ethanol: The total planted surface area devoted to principal crops in the
US has stayed roughly constant at 300m acres over the last few years. In spite of high food
prices, recent incentives to boost ethanol production have resulted in more corn being planted at
the expense of other crops rather than in an increase in the total area planted. For the rails, there
is an opportunity to transport ethanol that was not there before as they did not usually transport
the processed products resulting from these crops. Congress passed the Energy Independence
and Security Act in late 2007 with overwhelming bipartisan support. Among other things, the act
mandates increased ethanol production targets. The Bill has been widely criticized for setting
unrealistic targets and for prescribing the wrong solution to address carbon emissions and energy
dependence. If this legislation were to be rendered ineffectual, BNI would be likely to see more
moderate volume increases in this segment of its business. At this time, this development seems
unlikely in spite of some efforts in this direction.
Construction: Construction remains a weak spot in the economy and it could drag down growth
for BNI’s industrial group if it stays in a depressed state for longer than we expect. We have
assumed that the sector will start to grow in 2009.
Oil price: Fuel now accounts for roughly 20% of BNI’s revenues. We think that this amount will
come down as oil prices ease over the next few years to the mid US$90s in 2010–12. There are
many different readings of what could happen to the price of oil. If it were to stay constant or
increase, BNI’s ability to pass on the added fuel surcharges might be curtailed.
19 August 2008 36
Summary of risks for railroad companies in our coverage
Fig 52 Summary of risks facing the railroad companies in our coverage

Ticker Risks
BNI • Intermodal volumes recover more slowly than expected
• A sizable portion of international intermodal traffic is diverted to the East Coast in all-water transport
• The company cannot increase base rates as anticipated
• BNI fails to improve productivity
CNI • Intermodal volumes grow more slowly than expected

• The CND continues to appreciate against the USD
• The downturns in the housing and auto industries turn out to be deeper than expected
• CNI fails to improve productivity
CP • Intermodal volumes grow more slowly than expected

• The CND continues to appreciate against the USD
• Exports of commodities from Canada grow more slowly than anticipated
• CP fails to improve productivity
• On the upside, share buybacks could increase stock prices (CP is the only company that has not announced a program)
CSX • Intermodal volumes recover more slowly than expected

• Coal exports grow more slowly than expected
• CSX fails to improve productivity
NSC • Intermodal volumes recover more slowly than expected

• Coal exports grow more slowly than expected; there seems to be a particular expectation that NSC can profit from coal exports
• NSC fails to improve productivity
UNP • Intermodal volumes recover more slowly than expected

• Coal and grain exports fail to sufficiently boost volume growth; UNP seems to be expected to grow above GDP
• UNP fails to improve productivity; UNP appears to face fairly aggressive expectations to improve its performance
Positive potential news flow

Earnings call showing improving operating performance: We see the most potential
upside to BNI from a steady improvement of operating metrics beyond the effects of rate
increases and fuel prices, or from stronger volumes than expected.
Sustained increases in weekly shipping volumes: The economy has proved more
resilient than expected even though there is no shortage of pessimistic forecasts. In the event
of an early recovery, weekly shipping volumes should provide a good indication of better times
ahead.
Passage of a law on carbon emissions: Removing uncertainty on the future of carbon
emissions is likely to encourage State Public Utility Commissions to approve coal-fired power
plants and utilities to actually build them. In this event, coal miners would feel more
comfortable in expanding supply while managing to keep prices up.
Sustained increases in container traffic at West Coast ports: Signs that imports are
picking up more quickly than expected would lead us to expect stronger volumes for BNI.
19 August 2008 37
Negative potential news flow

Further action on rail Bills in Congress: Incremental actions that make more likely the
passage of any of the two Bills in Congress proposing re-regulation of the rail industry.
Reduction of tariffs on imported ethanol: Any legislation that allows states to escape
federally-mandated ethanol targets or that provides an alternative to domestic production in
order to meet those targets.
Increase in the price of oil: BNI shares and those of its peers have consistently lost ground
with increases in the price of oil.
Potential corporate activity

Acquisitions: Consolidation of the rail industry is substantially accomplished. Acquisitions of
short-haul rail companies might make sense if they can provide rights-of-way or terminals in a
coveted spot such as Chicago. Even then, community activism can make it tricky to complete
the acquisition. We do not expect BNI to undertake acquisitions for the next several years.
19 August 2008 38
Financials
Year Ending 31 December Currency: USD
Valuation Units 06 A 07 A 08 E 09 E 10 E 11 E 12 E 13 E
WACC % 9.1% 9.1% 8.5% 9.0% 9.1% 8.7% 9.0% 9.2% Recommendation Outperform
k(Debt) % 4.9% 5.1% 4.6% 5.1% 5.0% 4.6% 4.9% 5.0% Share Price $ 98.8
k(Equity) % 10.3% 10.2% 9.4% 9.9% 10.0% 9.6% 9.9% 10.1% Valuation $ 105.4
10 year bond % 4.7% 4.7% 4.0% 4.5% 4.6% 4.3% 4.6% 4.8% 12-mth Target $ 114.5
Market Risk premium % 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% Upside/Downside to PT 15.9%
NPV (Price USD/share) $/shr 87.7 100.4 107.8 117.9 128.8 140.8 154.5 169.7
Leverage Ratios Shares on Issue (m sh)
Net Debt : EBIT x 2.0x 2.2x 2.1x 1.9x 1.8x 1.7x 1.6x 1.5x + Common Stock 344.9
EBIT : Interest x 7.3x 6.8x 6.9x 6.8x 7.5x 8.6x 8.7x 8.6x + Dilutive securities 6.4
Trading Multiples Units 06 A 07 A 08 E 09 E 10 E 11 E 12 E 13 E Total 351.3
Equity Value (US$m) 34,715
EV/EBITDA x 7.2x 7.7x 8.1x 7.2x 6.5x Net Debt (US$m)* 7,816
PER x 14.5x 16.3x 16.7x 14.2x 11.8x Enterprise Value (US$m) 42,531
Operational Metrics (period-end) Units 1Q07 A 2Q07 A 3Q07 A 4Q07 A 1Q08 A 2Q08 A 3Q08 E 4Q08 E 05 A 06 A 07 A 08 E 09 E 10 E
Volume ('000 carloads) # 2,507 2,581 2,630 2,600 2,486 2,509 2,614 2,674 10,024 10,637 10,318 10,283 10,631 11,182
Growth YoY % -0.6% -3.7% -4.7% -2.9% -0.8% -2.8% -0.6% 2.8% 5.1% 6.1% -3.0% -0.3% 3.4% 5.2%
Industrial # 390 431 431 412 403 422 417 410 1,655 1,686 1,664 1,652 1,688 1,741
Energy/Coal # 594 611 627 640 634 589 631 668 2,238 2,458 2,472 2,521 2,602 2,765
Agricultural # 247 239 265 282 284 262 262 283 916 973 1,033 1,091 1,118 1,163
Intermodal # 1,235 1,256 1,268 1,224 1,126 1,193 1,269 1,273 5,038 5,346 4,983 4,861 5,068 5,355
Automotive # 41 44 39 42 39 43 35 41 177 174 166 158 156 158
Revenue / carload USD/car 1,414 1,448 1,501 1,585 1,667 1,733 1,825 1,767 1,258 1,367 1,488 1,749 1,756 1,756
Growth YoY % 5.8% 8.0% 8.6% 12.6% 17.9% 19.7% 21.6% 11.5% 11.6% 8.7% 8.8% 17.6% 0.4% 0.0%
Industrial USD/car 2,169 2,204 2,232 2,248 2,330 2,479 2,724 2,524 1,890 2,129 2,214 2,516 2,529 2,530
Energy/Coal USD/car 1,279 1,270 1,354 1,397 1,505 1,531 1,653 1,569 1,094 1,186 1,326 1,565 1,579 1,587
Agricultural USD/car 2,534 2,552 2,574 2,851 3,049 3,160 3,141 3,202 2,328 2,494 2,635 3,138 3,170 3,186
Intermodal USD/car 968 1,014 1,053 1,114 1,115 1,199 1,289 1,251 892 961 1,037 1,217 1,223 1,229
Automotive USD/car 2,829 2,886 3,077 3,167 3,308 3,326 3,756 3,556 2,288 2,718 2,988 3,476 3,502 3,502
Op expenses / carload USD/car 1,177 1,163 1,167 1,267 1,362 1,438 1,460 1,423 1,004 1,078 1,194 1,421 1,388 1,355
Op margin / carload % 16.7% 19.6% 22.3% 20.0% 18.3% 17.1% 20.0% 19.4% 20.2% 21.2% 19.8% 18.7% 21.0% 22.8%
Average employees 000 41.0 41.5 41.3 41.0 40.2 41.4 42.6 44.3 39.5 41.5 41.2 42.1 42.7 43.6
Price of fuel $/gallon 1.81 2.17 2.31 2.57 2.77 3.51 4.10 3.40 1.40 1.84 2.22 3.44 2.97 2.66
EPS USD/shr 0.96 1.20 1.48 1.46 1.30 1.34 1.66 1.63 4.01 5.10 5.10 5.92* 6.97 8.35
Growth YoY % -11.8% -5.3% 11.6% 2.7% 35.0% 11.9% 11.8% 11.8% 90.9% 27.3% -0.1% 16.2% 17.7% 19.7%
EBITDA USD m 1,001 1,163 1,325 1,290 1,216 1,220 1,420 1,404 3,997 4,647 4,779 5,260 5,922 6,599
Margin % 27.5% 30.3% 32.6% 30.4% 28.5% 27.2% 29.0% 28.9% 30.8% 31.0% 25.8% 28.5% 30.9% 32.7%
Taxes on EBIT USD m (168) (166) (207) (218) (615) (279) (345) (335) (651) (916) (802) (1,239) (1,420) (1,605)
Capex USD m (537) (615) (623) (473) (468) (574) (707) (624) (1,750) (2,014) (2,248) (2,372) (2,666) (2,874)
Change in Working Capital USD m 57 (132) (8) (15) 44 (190) 101 383 (59) (23) (98) 338 (56) 35
FCF Enterprise USD m 353 250 487 584 177 177 469 828 1,537 1,694 1,631 1,987 1,780 2,155
Growth YoY % 64.0% 10.2% -3.7% 21.8% -10.4% 21.1%
Profit and Loss Units 1Q07 A 2Q07 A 3Q07 A 4Q07 A 1Q08 A 2Q08 A 3Q08 E 4Q08 E 05 A 06 A 07 A 08 E 09 E 10 E
Revenues USD m 3,645 3,843 4,069 4,245 4,261 4,478 4,896 4,853 12,987 14,985 15,802 18,488 19,190 20,171
Revenue growth YoY (%) % 5.3% 3.8% 3.3% 9.4% 16.9% 16.5% 20.3% 14.3% 18.6% 15.4% 5.5% 17.0% 3.8% 5.1%
Operating expenses USD m 2,951 3,002 3,068 3,295 3,386 3,607 3,818 3,805 10,065 11,468 12,316 14,615 14,752 15,156
Operating ratio (%) % 81.0% 78.1% 75.4% 77.6% 79.5% 80.5% 78.0% 78.4% 77.5% 76.5% 77.9% 79.1% 76.9% 75.1%
+ Labor and fringe benefits USD m 932 925 937 979 983 951 979 1,017 3,515 3,816 3,773 3,929 4,153 4,363
+ Fuel USD m 652 771 814 960 1,009 1,245 1,466 1,330 1,959 2,734 3,197 5,050 4,497 4,209
+ Equipment rents USD m 232 237 235 238 230 223 244 258 886 930 942 955 1,038 1,124
+ Depreciation and amortization USD m 307 322 324 340 341 349 342 356 1,075 1,130 1,293 1,387 1,483 1,584
+ Purchased services and materials USD m 326 240 257 265 298 299 267 288 916 952 1,088 1,151 1,251 1,355
Operating Income USD m 694 841 1,001 950 875 871 1,079 1,048 2,922 3,517 3,486 3,873 4,439 5,015
Op income growth YoY (%) % -12.4% -2.5% 8.8% 0.8% 26.1% 3.6% 7.8% 10.3% 73.3% 20.4% -0.9% 11.1% 14.6% 13.0%
+ Other income USD m (5) (6) (6) (1) - (162) - - (37) (40) (18) (162) - -
- Interest expense USD m (121) (132) (132) (126) (134) (140) (145) (146) (437) (485) (511) (565) (653) (668)
Income before income taxes USD m 568 703 863 823 741 569 934 902 2,448 2,992 2,957 3,146 3,785 4,347
- Income taxes USD m (219) (270) (333) (306) (286) (219) (358) (345) (917) (1,105) (1,128) (1,208) (1,450) (1,665)
Income from continuing operations USD m 349 433 530 517 455 350 576 556 1,531 1,887 1,829 1,938 2,336 2,682
+ Income from discontinued operations USD m - - - - - - - - - - - - - -
+ Cumulative effect of accounting change USD m - - - - - - - - - - - - - -
Net income USD m 349 433 530 517 455 350 576 556 1,531 1,887 1,829 1,938 2,336 2,682
Net income / Revenues % 9.6% 11.3% 13.0% 12.2% 10.7% 7.8% 11.8% 11.5% 11.8% 12.6% 11.6% 10.5% 12.2% 13.3%
+ Preferred Dividends USD m - - - - - - - - - - - - - -
Net Income: common stock USD m 349 433 530 517 455 350 576 556 1,531 1,887 1,829 1,938 2,336 2,682
Closing Shares (basic) m sh 356.1 354.9 351.0 349.3 346.3 344.9 341.3 334.8 371.8 361.1 352.8 341.8 329.1 315.5
Closing Shares (diluted) m sh 363.7 360.8 357.1 354.3 351.3 349.2 347.4 340.9 381.8 369.8 358.9 347.2 335.0 321.4
Cashflow Units 1Q07 A 2Q07 A 3Q07 A 4Q07 A 1Q08 A 2Q08 A 3Q08 E 4Q08 E 05 A 06 A 07 A 08 E 09 E 10 E
Net cash in Operating Activities USD m 1,148 428 889 1,027 931 774 1,388 1,439 2,609 3,108 3,492 4,533 4,242 4,830
Net cash in Investing Activities USD m (831) (503) (777) (263) (759) (699) (707) (624) (2,023) (2,086) (2,374) (2,788) (2,666) (2,874)
Net cash in Financing Activities USD m (300) 76 (130) (809) 23 (119) (711) (890) (833) (722) (1,163) (1,697) (1,565) (1,934)
Forex effects on cash USD m - - - - - - - - - - - - - -
Net cash movement USD m (17) (1) 18 45 (195) 44 30 74 247 (300) 45 (47) (11) (22)
Balance Sheet Units 1Q07 A 2Q07 A 3Q07 A 4Q07 A 1Q08 A 2Q08 A 3Q08 E 4Q08 E 05 A 06 A 07 A 08 E 09 E 10 E
Cash USD m 392 393 375 330 525 481 451 377 75 375 330 377 388 410
Current assets USD m 1,541 1,949 2,106 1,851 2,147 2,310 2,422 2,065 1,805 1,806 1,851 2,065 2,108 2,197
Investments USD m - - - - - - - - - - - - - -
PP&E USD m 28,166 28,632 29,048 29,567 29,783 30,131 30,496 30,764 26,551 27,921 29,567 30,764 31,946 33,237
Other USD m 2,009 1,880 2,006 1,835 2,097 2,220 2,006 1,835 1,873 1,695 1,835 1,835 1,835 1,835
Total Assets USD m 32,108 32,854 33,535 33,583 34,552 35,142 35,376 35,041 30,304 31,797 33,583 35,041 36,278 37,679
Current liabilities USD m 2,996 2,968 3,048 2,824 3,108 3,051 3,229 3,324 2,773 2,853 2,824 3,324 3,301 3,417
Debt (long-term and current portion) USD m 7,450 7,968 8,223 8,146 8,644 8,819 8,716 8,619 7,154 7,385 8,146 8,619 8,955 9,293
Deferred income taxes USD m 8,235 8,316 8,433 8,484 8,618 8,698 9,037 9,047 7,916 8,298 8,484 9,047 9,395 9,775
Other liabilities USD m 872 853 842 843 850 1,014 908 901 878 830 843 901 943 991
Shareholder Funds USD m 10,530 10,669 10,879 11,144 11,200 11,333 11,301 11,064 9,508 10,528 11,144 11,064 11,499 11,909
Total Liabilities & Shareholder Funds USD m 32,108 32,854 33,535 33,583 34,552 35,142 35,376 35,041 30,304 31,797 33,583 35,041 36,278 37,679
Indebtedness
+ Bank & Securitized Debt, Capital leases $m 7,450 7,968 8,223 8,146 8,644 8,819 8,716 8,619 7,154 7,385 8,146 8,619 8,955 9,293
+ Operating leases 1,991 1,991 1,991 1,991 2,324 2,324 2,324 2,324 1,559 1,964 1,991 2,324 2,449 2,550
+ Preferred Stock $m - - - - - - - - - - - - - -
Total Debt $m 9,441 9,959 10,214 10,137 10,968 11,143 11,040 10,943 8,713 9,349 10,137 10,943 11,403 11,843
less Cash $m (392) (393) (375) (330) (525) (481) (451) (377) (75) (375) (330) (377) (388) (410)
Net Debt $m 9,049 9,566 9,839 9,807 10,443 10,662 10,589 10,566 8,638 8,974 9,807 10,566 11,015 11,433
Note: Priced as of August 14, 2008; historical multiples are calculated as of year-end; *2008 EPS includes US$119 million of one-time environmental
charges not reflected in Net Income.
19 August 2008 39
19 August 2008 40
19 August 2008 41
Important disclosures:
Recommendation definitions Volatility index definition* Financial definitions
Macquarie - Australia/New Zealand This is calculated from the volatility of historic price All "Adjusted" data items have had the following adjustments
Outperform – return >5% in excess of benchmark return movements. made:
(>2.5% in excess for listed property trusts) Added back: goodwill amortisation, provision for catastrophe
Neutral – return within 5% of benchmark return (within Very high–highest risk – Stock should be reserves, IFRS derivatives & hedging, IFRS impairments &
2.5% for listed property trusts) expected to move up or down 60–100% in a year – IFRS interest expense
Underperform – return >5% below benchmark return investors should be aware this stock is highly Excluded: non recurring items, asset revals, property revals,
(>2.5% below for listed property trusts) speculative. appraisal value uplift, preference dividends & minority
Macquarie – Asia/Europe interests
Outperform – expected return >+10% High – stock should be expected to move up or
Neutral – expected return from -10% to +10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa*
Underperform – expected return <-10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets
ROA Banks/Insurance = adjusted net profit /average total
Macquarie First South - South Africa Medium – stock should be expected to move up or assets
Outperform – expected return >+10% down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds
Neutral – expected return from -10% to +10% Gross cashflow = adjusted net profit + depreciation
Underperform – expected return <-10% Low–medium – stock should be expected to move *equivalent fully paid ordinary weighted average number of
Macquarie - Canada up or down at least 25–30% in a year. shares
Outperform – return >5% in excess of benchmark return
Neutral – return within 5% of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks are
Underperform – return >5% below benchmark return down at least 15–25% in a year. modelled under IFRS (International Financial Reporting
* Applicable to Australian/NZ stocks only Standards).
Macquarie - USA
Outperform (Buy) – return >5% in excess of benchmark
return
Neutral (Hold) – return within 5% of benchmark return
Underperform (Sell)– return >5% below benchmark
return
Recommendations – 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations
Recommendation proportions – For quarter ending 30 June 2008

AU/NZ Asia RSA USA CA EUR
Outperform 41.88% 66.96% 66.13% 50.82% 71.01% 43.00% (for US coverage by MCUSA, 0.0% of stocks followed are investment banking clients)
Neutral 42.96% 16.30% 22.58% 44.26% 24.64% 48.00% (for US coverage by MCUSA, 3.7% of stocks followed are investment banking clients)
Underperform 15.16% 16.74% 11.29% 4.92% 4.35% 9.00% (for US coverage by MCUSA, 0.0% of stocks followed are investment banking clients)
In the next 3 months, Macquarie Capital (USA) Inc. ("MCUSA") or an affiliate expects to receive or intends to seek compensation for investment banking
services, as defined under FINRA Rule 2711(a)(3), to Burlington Northern Santa Fe, Canadian National Railway, Canadian Pacific, CSX Corporation, Norfolk
Southern, and Union Pacific.
Within the last 12 months, Macquarie Capital (USA) Inc. ("MCUSA") or an affiliate provided investment banking services, as defined under FINRA Rule
2711(a)(3), to Norfolk Southern.
Analyst Certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers
and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this
research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd
ABN 94 122 169 279 (AFSL No. 318062 )(MGL) and its related entities (the Macquarie Group) and has taken reasonable care to achieve and maintain
independence and objectivity in making any recommendations.
Disclaimers: Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets
North America Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Securities Ltd; Macquarie Capital Securities (Singapore) Pte Ltd; Macquarie Securities
(NZ) Ltd; and Macquarie First South Securities (Pty) Limited are not authorised deposit-taking institutions for the purposes of the Banking Act 1959
(Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL) or
MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the above mentioned entities. MGL provides a
guarantee to the Monetary Authority of Singapore in respect of the obligations and liabilities of Macquarie Capital Securities (Singapore) Pte Ltd for up to
SGD 35 million. This research has been prepared for the general use of the wholesale clients of the Macquarie Group and must not be copied, either in
whole or in part, or distributed to any other person. If you are not the intended recipient you must not use or disclose the information in this research in any
way. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any
transaction. In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before
making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is
appropriate in light of their particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of
securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent
in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the
investment. This research is based on information obtained from sources believed to be reliable but we do not make any representation or warranty that it is
accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change
without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use
of this research and/or further communication in relation to this research.
Other Disclaimers: In Canada, securities research is prepared, approved and distributed by Macquarie Capital Markets Canada Ltd, a participating
organisation of the Toronto Stock Exchange, TSX Venture Exchange & Montréal Exchange. Macquarie Capital Markets North America Ltd., which is a
registered broker-dealer and member of FINRA, accepts responsibility for the contents of reports issued by Macquarie Capital Markets Canada Ltd in the
United States and to US persons and any person wishing to effect transactions in the securities described in the reports issued by Macquarie Capital
Markets Canada Ltd should do so with Macquarie Capital Markets North America Ltd. Securities research is issued and distributed by Macquarie Securities
(Australia) Ltd (AFSL No. 238947) in Australia, a participating organisation of the Australian Securities Exchange; Macquarie Securities (NZ) Ltd in New
Zealand, a licensed sharebroker and New Zealand Exchange Firm; Macquarie Capital (Europe) Ltd in the United Kingdom, which is authorised and
regulated by the Financial Services Authority (No. 193905); Macquarie Capital Securities Ltd in Hong Kong, which is licensed and regulated by the Securities
and Futures Commission; Macquarie Capital Securities (Japan) Limited in Japan, a member of the Tokyo Stock Exchange, Inc., Osaka Securities Exchange
19 August 2008 42
Co. Ltd, and Jasdaq Securities Exchange, Inc. (Financial Instruments Firm, Kanto Financial Bureau(kin-sho) No. 231, a member of Japan securities Dealers
Association and Financial Futures Association of Japan); Macquarie First South Securities (Pty) Limited in South Africa, a member of the JSE Limited and in
Singapore, Macquarie Capital Securities (Singapore) Pte Ltd (Company Registration Number: 198702912C), a Capital Markets Services licence holder
under the Securities and Futures Act to deal in securities and provide custodial services in Singapore. Pursuant to the Financial Advisers (Amendment)
Regulations 2005, Macquarie Capital Securities (Singapore) Pte Ltd is exempt from complying with sections 25, 27 and 36 of the Financial Advisers Act.
Clients should contact analysts at, and execute transactions through, a Macquarie Group entity in their home jurisdiction unless governing law permits
otherwise. Macquarie Capital (USA) Inc., which is a registered broker-dealer and member of FINRA, accepts responsibility for the content of each research
report prepared by one of its non-US affiliates when the research report is distributed in the United States by Macquarie Capital (USA) Inc. Macquarie Capital
(USA) Inc. affiliate research reports and affiliate employees are not subject to the disclosure requirements of FINRA rules. Any persons receiving this report
directly from Macquarie Capital (USA) Inc. and wishing to effect a transaction in any security described herein should do so with Macquarie Capital (USA)
Inc. The information contained in this document is confidential. If you are not the intended recipient, you must not disclose or use the information in this
document in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of
any e-mails or attached files and are not responsible for any changes made to them by any other person. MGL has established and implemented a conflicts
policy at group level (which may be revised and updated from time to time) (the "Conflicts Policy") pursuant to regulatory requirements (including the FSA
Rules) which sets out how we must seek to identify and manage all material conflicts of interest. Disclosures with respect to the issuers, if any, mentioned in
this research are available at www.macquarie.com/research/disclosures. © Macquarie Group
Auckland Bangkok Calgary Hong Kong Jakarta Johannesburg Kuala Lumpur

Tel: (649) 377 6433 Tel: (662) 694 7999 Tel: (1 403) 218 6650 Tel: (852) 2823 3588 Tel: (62 21) 515 1818 Tel: (27 11) 343 2258 Tel: (60 3) 2059 8833
London Manila Melbourne Montreal Mumbai Perth Seoul
Tel: (44 20) 7065 2000 Tel: (63 2) 857 0888 Tel: (613) 9635 8139 Tel: (1 514) 925 2850 Tel: (91 22) 6653 3000 Tel: (618) 9224 0888 Tel: (82 2) 3705 8500
Shanghai Singapore Sydney Taipei Tokyo Toronto New York
Tel: (86 21) 6841 3355 Tel: (65) 6231 1111 Tel: (612) 8232 9555 Tel: (886 2) 2734 7500 Tel: (81 3) 3512 7900 Tel: (1 416) 848 3500 Tel: (1 212) 231 2500
Available to clients on the world wide web at www.macquarie.com/research and through Thomson Financial, FactSet, Reuters and Bloomberg.
19 August 2008 43
Research
Heads of Equity Research Healthcare & Biotech Telecommunications
John O’Connell (Global Co – Head) (1 212) 231 2631 Stefan Quenneville (Montreal) (514) 925 2856 Guy Peddy (London) (44 20) 3037 4509
David Rickards (Global Co – Head) (612) 8232 4017 Nik Kershaw (Johannesburg) (2711) 343 2211
Graham Copley (US) (1 212) 231 2632
Industrials
Utilities
Stephen Harris (Canada) (1 416) 848 3655 Aerospace & Defense
Angie Storozynski (New York) (1 212) 231 2569
Alan Watson (Europe) (44 20) 3037 4383 Rob Stallard (New York) (1 212) 231 2486
Matthew Akman (Toronto) (1 416) 848 3510
Julian Wentzel (South Africa) (2711) 343 2202
Capital Goods Stephen Harris (Toronto) (1 416) 848 3655
Consumer Staples Steven Song (New York) (1 212) 231 2455
Commodities & Precious Metals
Food & Beverages Rowan Goeller (Johannesburg) (2711) 343 2336
Fabrice Ndjodo (Johannesburg) (2711) 343 2337 Jim Lennon (London) (44 20) 3037 4271
Julian Wentzel (Johannesburg) (2711) 343 2202
Adam Rowley (London) (44 20) 3037 4272
Transportation – Infrastructure
Consumer Discretionary
Arturo Vernon (New York) (1 212) 231 2566 Emerging Leaders
Gaming Ben Stretch (New York) (1 212) 231 2574 Gerald Brockman (New York) (1 212) 231 2473
Joel Simkins (New York) (1 212) 231 2635 Scott Ryall (London) (44 20) 3037 4271 Antonio Antezano (New York) (1 212) 231 1154
Blake Hossack (Toronto) (1 416) 848 3512 Information Technology Cooley May (New York) (1 212) 231 2586
Martin Dullaart (Johannesburg) (2711) 343 2322 Karl Oelschlaeger (New York) (1 212) 231 2456
Dennis Fong (Toronto) (416) 848 3696
Media Glenn Jamieson (Toronto) (416) 848 3658 Sameer Rathod (New York) (1 212) 231 2474
Nik Kershaw (Johannesburg) (2711) 343 2211
Materials Quantitative
Retailing
Chemicals/Containers, Packaging/Paper & Yin Luo (Toronto) (1 416) 848 3569
David Pupo (Toronto) (1 416) 848 3505
Hannes Uys (Johannesburg) (2711) 343 2281
Julian Wentzel (Johannesburg) (2711) 343 2202 Forest Products, Construction Materials
Caroline Learmonth (Johannesburg) (2711) 343 2204 Alternative Strategies
Energy
Julian Wentzel (Johannesburg) (2711) 343 2202 Blake Hossack (Toronto) (1 416) 848 3512
Jason Gammel (New York) (1 212) 231 2633 Samora Adams (Cape Town) (2721) 813 2612
Wilson Leong (New York) (1 212) 231 2560
Global Metals & Mining
Mark Heim (Calgary) (1 403) 218 6652
Pierre Vaillancourt (Toronto) (1 416) 848 3647 Economics and Strategy
George Albino (Toronto) (1 416) 848 3594 Stephen Harris (Toronto) (1 416) 848 3655
Patrick Tomalin (Toronto) (1 416) 848 3551
Duncan McKeen (Toronto) (1 416) 848 3576 Nazmeera Moola (Cape Town) (2721) 670 1213
Ian Macqueen (Calgary) (1 403) 218 6659
Sam Catalano (London) (44 20) 3037 4278 Gina Schoeman (SA Economics) (2711) 343 2305
Jenny Mikhareva (Calgary) (1 403) 218 6655
Justin Froneman (Johannesburg) (2711) 343 2293
Iain Reid (London) (44 20) 3037 4085
David Hall (Johannesburg) (2711) 343 2210 Find our research at
Brendan Warn (London) (44 20) 3037 4559
Avishkar Nagaser (Johannesburg) (2711) 343 2280
Macquarie: www.macquarie.com.au/research
Alternative Energy David Pleming (Johannesburg) (2711) 343 2287
Thomson: www.thomson.com/financial
Kelly Dougherty (New York) (1 212) 231 2493
Real Estate Reuters: www.knowledge.reuters.com
Shai Hill (London) (44 20) 3037 4232
Bloomberg: MAC GO
Ben Kluftinger (London) (44 20) 3037 4077 Property Trusts & Developers
Factset: http://www.factset.com/home.aspx
Nicholas Pirsos (New York) (1 212) 231 2457
Financials Contact Gareth Warfield for access (612) 8232 3207
Ken Zener (New York) (1 212) 231 2479
Banks Leon Allison (Johannesburg) (2711) 343 2209 Email addresses
Alan Hartdegen (Johannesburg) (2711) 343 2200 Global Property Securities Analytics FirstName.Surname@macquarie.com
Diversified Financials Alex Moss (London) (44 20) 3 037 4086 eg. David.Rickards@macquarie.com
Blake Hossack (Toronto) (416) 848 3512
Sales
US Sales US Sales Trading Michael Zuk (Toronto) (416) 848 3688
Michael Marcotte (Montréal) (514) 925 2853
Greg Coleman (New York) (1 212) 231 2567 Austin Graham (New York) (1 212) 231 2494
Roy McDowall (Montréal) (514) 925 2864
Brad Bullock (New York) (1 212) 231 2573 Jon Patria (New York) (1 212) 231 2488
Mark Little (New York) (1 212) 231 2577 Carly Dean (Vancouver) (604) 639 6349
Matt Lahey (New York) (1 212) 231 2487
Richard Sears (New York) (1 212) 231 2489 Ryan Males (Vancouver) (604) 639 6372
Robert Risman (New York) (1 212) 231 2555
Renee Connolly (New York) (1 212) 2312480 Samantha Molina (New York) (1 212) 231 2502 Canada Trading
Bill Cleary (New York) (1 212) 231 2495 André Conway (New York) (1 212) 231 2503 Perry Catellier (Agency Trading) (416) 848 3619
Jack Rose (San Francisco) (1 415) 762 5002 John Redmond (New York) (1 212) 231 2549 Tony Oram (Liability Trading) (416) 848 3631
Wes Dalton (San Francisco) (1 415) 762 5007 James Henry (New York) (1 212) 231 2555 Bob Bastianon (Toronto) (416) 848 3562
Roni Gudell (Boston) (1 617) 217 2087 James Trounson (New York) (1 212) 231 2547 John Bellchambers (Toronto) (416) 848 3599
Marc Rosa (New York) (1 212) 231 2514 Ben Chiu (Toronto) (416) 848 3513
EU Sales
Canada Sales Paul Dorland (Toronto) (416) 848 3529
Doug Stone (New York) (1 212) 2312606
Jesse Janzen (Vancouver) (604) 639 6379
Equities Tim Sorensen (Toronto) (416) 848 3623
Mike Nininger (Toronto) (416) 848 3625
Alex Ball (Toronto) (416) 848 3554
Stevan Vrcelj (Head of Global Sales) (612) 8232 5999 Cheryl Polan (Toronto) (416) 848 3633
Jason Beales (Toronto) (416) 848 3635
Luke Sullivan (New York) (1 212) 231 2507 Stephen Rawn (Toronto) (416) 848 3611
Craig Brenner (Toronto) (416) 848 3626
Alex Rothwell (Toronto) (1 416) 848 3677 Robyn Scott (Toronto) (416) 848 3513
Jessica Butt (Toronto) (416) 848 3620
Rob Fabbro (Continental Europe) (44 20) 7065 2031 John Szucs (Toronto) (416) 848 3678
Sasha Djurdjevic (Toronto) (416) 848 3573
Charles Nelson (London) (44 20) 7065 2032 Aadam Al-Khabyyr (Montréal) (514) 925 2857
Chris Naprawa (Toronto) (416) 848 3634
Joanne Patterson (Montréal) (514) 925 2872
Tim Newington (Toronto) (416) 848 3558
Cindy Vaincourt (Montréal) (514) 925 2867
Harry Pokrandt (Toronto) (416) 848 3546
August 08

United States

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

United States

Uploaded by

Copyright:

Available Formats

UNITED STATES Burlington Northern Santa Fe

19 August 2008 Riding the wave of trade

The lifeblood of nations

High oil prices are good

BNI US Outperform Burlington Northern Santa Fe Corp

Fig 1 Valuation comparison to transport stocks (US$)

US$ / share Index

Revenues Carloads Ton-miles

Intermodal Industrial Coal Agricultural Automotive

Source: Company data, 2007, Macquarie Capital (USA), August 2008

The lifeblood of nations

30.0 CAGR 95-05 = 6.9%

West Coast East Coast Gulf Coast Other

Note: TEU = Twenty-foot equivalent container

Fig 6 New housing starts in the US have continued to decline

Includes single-family and multi-unit housing; 2008 is forecast

Fig 7 Index of industrial production 2002–08

Index (2002 = 100)

Other feeds &

Source: Company data, Macquarie Capital (USA), August 2008

Fig 9 We expect BNI to grow its volume at 3–4% pa

CAGR 03-07 = 3.6% CAGR 07-12 = 3.6% 12,303

1,118 1,163 1,199 1,244

Other consumer prodcuts Industrial Agricultural Intermodal Coal Automotive

Source: Company data, Macquarie Capital (USA), August 2008

11.2% 4.8% 4.7% 4.5%

BNI CNI CP CSX NSC UNP

1,600 CAGR 02-07 = 5.9% 30%

1,000 895 896 17.2% 22.1%

Fig 14 BNI’s workforce productivity has continued to improve

GTM / employee, thousands

BNI Employees BNI GTM/Employees Ind GTM/Ind Employees

BNI Industry BNI Industry

High oil prices are good

Fig 17 Industry revenue/GTM has grown in real terms since 2004

Industry ROIC WACC

BNI has a consistent track record of giving cash back to investors

Target price of US$115 is above the 12-month average

Fig 20 EV to forward EBITDA

Industry Composite BNI

Share price and valuation

Industry includes BNI, CNI, CP, CSX, NSC and UNP.

Fig 22 BNI’s share price relative to the industry’s

Source: FactSet, Macquarie Capital (USA), August 2008

S&P 500 BNI Industry

Composite includes BNI, CNI, CP, CSX, NSC and UNP.

Fig 24 BNI’s share price performance relative to the industry’s

Industry = composite of BNI, CNI, CP, CSX, NSC and UNP

DCF analysis yields a price in line with current market values

Fig 25 DCF model, estimates from 2008 (US$)

Our target price is consistent with valuation multiples in the middle of

Fig 26 We expect BNI’s operating margin to expand as the economy improves

Revenues Op. Margin

Fig 27 We think BNI can grow its EPS at close to 18% pa

EPS EPS Growth (sec. axis)

Source: Company data, Macquarie Capital (USA), August 2008

Fig 28 We expect BNI's capex spending to continue at its current levels

BNI Capex BNI Capex/BNI Revenue Ind Capex/Ind Rev

Industry includes BNI, CNI, CP, CSX, NSC and UNP.

Fig 29 BNI's FCF to enterprise / Revenue

Fig 30 BNI's FCF to enterprise / Net income

Fig 31 BNI's repurchases / Net Income

Industry includes BNI, CNI, CP, CSX, NSC and UNP.